Central Bank Pumping Expectations

Not only is the ECB expected to deliver fresh easing measures when it meets on December 8, but we are now getting rather precise forecasts as to the expected size of the upcoming 'QE3' MBS monetization program by the Fed as well.

According to a recent article at Bloomerg:

„The biggest bond dealers in the U.S. say the Federal Reserve is poised to start a new round of stimulus, injecting more money into the economy by purchasing mortgage securities instead of Treasuries.

Fed Chairman Ben S. Bernanke and his fellow policy makers, who bought $2.3 trillion of Treasury and mortgage-related bonds between 2008 and June, will start another program next quarter, 16 of the 21 primary dealers of U.S. government securities that trade with the central bank said in a Bloomberg News survey last week. The Fed may buy about $545 billion in home-loan debt, based on the median of the firms that provided estimates.

While mortgage rates are already at about record lows, housing continues to constrain the economy, with the National Association of Realtors saying in Washington last week that the median price of U.S. existing homes dropped 4.7 percent in October from a year ago. Borrowers with a 30-year conventional mortgage would save $40 billion to $50 billion annually in aggregate if they could all refinance into a new loan with a 3.75 percent rate, according to JPMorgan Chase & Co.

“We need to see a bottom in home prices,” said Shyam Rajan, an interest-rate strategist in New York at Bank of America Corp., a primary dealer, in a Nov. 22 telephone interview. “These are not numbers that are going to get down your unemployment rate,” which has held at or above 9 percent every month except two since May 2009, he said. The company forecasts the Fed will buy $800 billion of securities, which may include Treasuries.

Efforts to bolster the economy are taking on new urgency with $1.2 trillion in automatic government spending cuts slated to begin in 2013. The Commerce Department said last week that gross domestic product expanded at a 2 percent annual rate in the third quarter, less than the 2.5 percent it originally projected, and Europe’s worsening debt crisis threatens to further curb global growth.“

The 'we' who need to 'see a bottom in house prices' are of course the big banks, as the value of their mortgage collateral continues to wilt. The same can not be said of first time home buyers, who would rather see lower prices.

It should be noted to this that the idea that the correction in home prices to their true market clearing level can be averted is completely mistaken. The only thing that can be achieved is delaying the process and thereby making it ultimately even worse.

This will of course not keep the Fed from intervening. The faith in the omnipotence of central planners is after all especially well developed among the planners themselves.


Monetary Cranks Unite!


Meanwhile, Ambrose Evans-Pritchard is joining the ranks of the monetary cranks (and there are more then a few of those) sotto voce in a recent missive entitled „Should the Fed save Europe from disaster?“. After counting down the litany of things that are currently going wrong and could conceivably get worse, he launches into the following diatribe:

„So the question arises, should the rest of the world take over management of Europe to prevent or mitigate disaster? Specifically, should the US Federal Reserve assume leadership as a monetary superpower and impose policy on a paralyzed ECB, acting as a global lender of last resort?

In essence, the US would do for EMU what it did in military and strategic terms for the Europe in the 1990s when Washington said enough is enough after squabbling EU leaders had allowed 200,000 people to be slaughtered in the Balkans. The Pentagon settled matters swiftly with “Operation Deliberate Force”, raining Tomahawk missiles on the Serb positions. Power met greater power.

Personally, I have not made up my mind about the wisdom of a Fed rescue. It is fraught with dangers, and one might argue that resources are better deployed breaking EMU into workable halves with minimal possible damage.

However, debate is already joined – and wheels are turning in Washington policy basements – so let me throw this out for readers to chew over.

Nobel economist Myron Scholes first floated the idea over lunch at a Riksbank forum in August. "I wonder whether Bernanke might not say that `we believe in a harmonized world, that the Europeans are our friends, and we know that the ECB can't print money to buy bonds because the Germans won't let them. And since the ECB will soon run out of money, we will step in and start buying European government bonds for them'. It is something to think about," he said.

This is not as eccentric as it sounds. The Fed’s Ben Bernanke touched on the theme in a speech in November 2002 – “Deflation: making sure it doesn't happen here” – now viewed as his policy `road map' in extremis.

"The Fed can inject money into the economy in still other ways. For example, the Fed has the authority to buy foreign government debt. Potentially, this class of assets offers huge scope for Fed operations," he said.

Berkeley’s Brad DeLong said it is time for Bernanke to act on this as the world lurches straight into 1931 and a Great Depression II. “The Federal Reserve needs to buy up every single European bond owned by every single American financial institution for cash,” he said.

The Fed could buy €2 trillion of EMU debt or more, intervening with crushing power. The credible threat of such action by the world’s paramount monetary force might alone bring Italian and Spanish yields back down below 5pc, before one bent nickel is even spent.  One presumes that the Fed would purchase both the triple AAA core and Club Med in a symmetric blast of monetary stimulus across the board, avoiding the (fiscal) error of targeting semi-solvent states. In sense, the Fed would do quantitative easing for the Europeans, whether they liked it or not.

David Zervos from Jefferies has proposed an extreme variant of this, accusing Germany’s fiscal Puritans of reducing Europe’s periphery to “indentured servants” and driving the whole region into depression with combined fiscal and monetary contraction.

“We in the US need to snuff out these sado-fiscalists and fast, they are a danger to the world. The US can force monetisation at the ECB. We should back up the forklift and buy Euro area bonds. Lots of them,” he said.“


(emphasis added)

Now, the gentleman from Jefferies is now doubt talking his own wilting book, so we should discount what he says a priori. Other than that, we would remind Mr. Evans-Pritchard that just because a bunch of monetary cranks – Bernanke among them – suggest that this might be a good idea, doesn't mean that it actually is one. As to Über-Keynesian DeLong, we think his outburst is just completely loopy, and that is putting it politely.

Perhaps all these people who are so eager to employ the printing press need a reminder that the central bank can not alter the amount of capital goods and real savings available to the economy by one iota. What it can do is lower the purchasing power of money – in essence stealing from savers and creditors in favor of debtors – and distort relative prices in the economy, thereby altering the patterns of saving, spending and investing. All of these alterations will make the situation worse, not better, as they will disturb the rational allocation of scarce resources.

We are always struck by the blithe assumptions underlying these breathlessly articulated demands. Apparently people like DeLong actually believe that printing money equates to creating wealth. Money however is merely the medium of exchange, it is not wealth as such. The activities of wealth creators in the economy are weakened, not strengthened, when additional  money is printed. It is definitely no coincidence that the 'weakest post WW2 recovery' has coincided with the biggest post WW2 money supply expansion.

If adding to the money supply is truly beneficial, why not allow every citizen to set up his own money printing press? That would surely 'increase spending', and therefore should, following the logic of the likes of Bernanke and DeLong, lead to 'economic growth'.  If they disagree with this proposition, they must explain what difference it makes when the Fed (and the associated banking cartel) does it. As far as we can tell the main difference is in who gets to profit from the redistributive effects of money printing. Of course it could be argued that if everyone were free to print, there would be no way of controlling the amount that is created. In that case, how about crediting every citizen with a pro rata amount of the newly printed money? Why is it not done in this manner? 

Evans-Pritchard seems to indicate here that one should prop up unsound debt by hook or by crook, if need be even against the wishes of those concerned. However, what can be expected to change if the debt is not propped up is in the main that the ownership of assets will be transferred from inept stewards of capital to decidedly more prudent ones. The assets concerned will not disappear.

So what good exactly is supposed to come of keeping the inept guys in charge at the expense of those who were prudent? We are eagerly awaiting an explanation.



It seems Congressman Barney Frank is finally retiring, after 16 consecutive terms, which he used very effectively to do untold economic damage. The man was a major stumbling block in the attempts to reform the GSE's and therefore bears a significant degree of responsibility for their later collapse and the financial crisis (although it would of course be an exaggeration to say that he was the main or even a major cause – we only want to point out that he shares responsibility). By agitating for 'affordable housing' by means of government intervention he contributed to making it unaffordable. Of course the GSE's and many other Wall Street institutions were the major donors to the political campaigns of this alleged (largely self-appointed) 'bane of Wall Street'. There are a great many perceptive comments in the reader comments section of the article about his resignation we linked to above. Inter alia, one reader remarked:

Somewhere on Wall Street a banker is sobbing.”

Indeed. We suspect there is more than just one. We wish Mr. Frank all the best in his new career as the voice of Elmer Fudd. Just kidding. He will likely pull in big bucks as a speaker and lobbyist henceforth.

As an aside, it seems that he will be replaced by none other than Maxine Waters – who is well known for her rather bizarre views. At least she will provide us with a great deal of entertainment. As we often point out, the most important thing about a politician is his entertainment value. Entertainment is the best thing we can possibly expect from members of this parasitic class in return for keeping them housed and (rather well) fed and cared for. There are of course notable exceptions such as Ron Paul, but they are few and far between.




The self-appointed 'bane of Wall Street' who counted Wall Street among his major donors finally retires. His brand of housing socialism contributed greatly to the boom and bust.

(Photo via: Sam's Destination)




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7 Responses to “Central Banks and Monetary Cranks”

  • RedQueenRace:

    I can never catch up on my reading. Sigh. Hope this isn’t too late.

    “The Fed could buy €2 trillion of EMU debt or more, intervening with crushing power. The credible threat of such action by the world’s paramount monetary force might alone bring Italian and Spanish yields back down below 5pc, before one bent nickel is even spent.”

    I’m not following DeLong’s reasoning here. The Fed can’t print euros so how does this process work to the benefit of Europe?

    Regardless of how this is implemented the Fed is presumably buying the bonds from US institutions. How does this help European rates for anything more than a momentary psychological blip? Unless the US institutions are going to turn around and continue to buy more of these foreign securities it would seem any drop in rates that occurs would quickly run into a real-world supply/demand dynamic that has not actually changed. All I see happening is the Fed injecting money into the US economy and taking yet more potentially bad debt off US financial institutions’ hands. Since the mechanics have not been spelled out I am also having a hard time wrapping my head around the money supply implications for both sides of the Atlantic and the currencies impact.

    One thing I’m pretty sure about is that it will take more than DeLong’s “credible threat” of Fed action to suppress rates for any length of time. The markets will see to that.

    • I think DeLong is worried more about the effect the euro area crisis might have on the US financial system than on the effect it will have on Europe.
      He wants the Fed to do this because he thinks that will help with averting the dreaded ‘double dip’ recession.

  • zerobs:

    You mention Jeffries and DeLong, but not Myron Scholes, who has run two hedge funds into collapse. I guess Ambrose thinks losing hundreds of millions isn’t as significant as a Nobel for esoteric modeling.

  • worldend666:

    Excerpt from Hitch-Hiker’s Guide to the Galaxy:

    Um listen, if we could, er, for a moment move on to the subject of fiscal policy –

    ”Fiscal Policy”?!


    How can you have money if none of you actually produce anything? It doesn’t grow on trees you know!

    You know If you would allow me to continue!

    Yes let him to continue.

    Since we decided a few weeks ago to adopt leaves as legal tender, we have, of course all become immensely rich.

    No really? Really?

    Yes, very good move…

    But, we have also run into a small inflation problem on account of the high level of leaf availability. Which means that I gather the current going rate has something like three major deciduous forests buying one ship’s peanut. So, um, in order to obviate this problem and effectively revalue the leaf, we are about to embark on an extensive defoliation campaign, and um, burn down all the forests. I think that’s a sensible move don’t you?

  • The question is, who is going to take the loss? If they put the loss in the Federal Reserve, the Euro banking cartels will sink the US for their own profit as the US took the load off them. Japan has languished because there was a massive loss of capital in Japan. Capital is a social phenomenon, rather than an individual one, as is imagined. Though a capitalist may hold title, his return is dependent on the social function his assets provide and the capacity of the consumer to pay in return. These hidden bubble losses interrupt this important cycle and hidden losses hide the solution and the losers and winners. We are watching proposal to put another coin in the fusebox.

  • I hope when this disaster is done, they boil these guys in oil. Bernanke will go down as one of the most treasonous men in US history, but only if we escape the clutches of socialist totalitarianism that is quite certain to attempt to assert itself from his creeping disaster.

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